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Sep’21 review: In-line performance; festive season, better supplies to aid volumes ahead

* Sep’21 volume performance was in line with expectations, with robust growth in CVs while muted growth in other segments. Domestic CV volumes were robust, aided by better freight availability/rates. Other segments were subdued, mainly due to supply issues, inauspicious period (20th September onward), delayed harvesting in certain parts of the country due to above-normal rainfall and high base on account of inventory filling last year.

* The upcoming festive season and some improvement in chip supplies is likely to support volumes ahead. Overall, we retain a positive view on the auto sector and our top picks are TTMT (TP: Rs400), AL (TP: Rs155), MSIL (TP: Rs8,600) and TVSL (TP: Rs780). In Ancillaries, we like MSS (TP: Rs300), BHFC (TP: Rs920) and APTY (TP: Rs305).

* CV volumes have improved, aided by healthy freight availability (almost 2.2mn e-way bills generated per day, which is higher than pre-Covid levels) and better freight rates (refer to Exhibit 7/8). Domestic volume growth was robust yoy for OEMs such as EIM at 78%, TTMT at 30% and AL at 12%. In comparison, MM witnessed a 50% fall owing to chip shortages. Our interactions with industry experts indicate expectations of a strong cyclical upturn in the next 3-4 years (Report).

* Domestic 2W volumes were weak, but exports were healthy due to better demand and stable forex rates in key geographies such as Africa, Latin America and South Asia (excluding Sri Lanka). Domestic volumes were notably lower due to a high base last year on account of inventory filling. In addition, chip shortages affected dispatches for premium motorcycles. Domestic volumes declined yoy by 51% for EIM-RE, 28% for HMCL and 21% for BJAUT, while TVSL registered a marginal growth of 1%.

* Domestic PV industry volumes declined by 37% yoy to ~186,000 units, owing to severe chip shortages. Domestic volumes declined yoy by 56% for MSIL and 12% for MM, while TTMT posted 21% growth. Chip shortages are expected to persist in Q3FY22, but supplies are expected to improve in a staggered manner. Lead times are likely to decrease from 36-40 weeks currently to 18-20 weeks by Q4FY22 and may come down to normal 8-12 weeks by FY23-end (Report).

* Domestic Tractor volumes were weak, with a decline of 30% yoy for ESC and 8% for MM due to a high base and delayed harvesting in certain parts of the country due to abovenormal rainfall.

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